Portugal

   

Economic Policies

#35
Key Findings
Despite significant gains as it emerges from austerity, Portugal scores comparatively poorly overall (rank 35) with respect to economic policies. Its score on this measure has improved by 1.5 points since 2015.

The Costa government has continued its strategy of gradually reversing past austerity measures without undermining budgetary policy or fiscal consolidation. Growth levels have been low but positive. A small decline in 2016’s growth relative to 2015 was worrisome.

Unemployment rates have fallen steadily, reaching 8.5% in late 2017, down more than two points in a year. These gains have been driven by growth and emigration. The minimum monthly wage has been increased. Business associations approved this policy in return for a reduction in their social-security contributions for affected workers.

The crisis-era extraordinary income surtax has largely been phased out, but taxes remain high. Tax avoidance remains a problem. Deficits have been brought to moderate levels, resulting in the first significant bond-rating upgrade in five years. Debt levels remain very high. The country’s tech-startup scene is gaining international attention.

Economy

#26

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
With regard to economic policy, the Costa government has maintained its strategy of gradually reversing past austerity measures without generating adverse impacts on budgetary policy or the country’s overall fiscal consolidation. It has also sought to facilitate investment through the SIMPLEX+ program, which aims to simplify bureaucratic processes.

The continuation of the previous period’s strategy has helped foster a more reliable economic environment during the period here under analysis.

The economy grew during the period under review. Quarterly economic-growth rates for 2016 were 1% in the first quarter, 1.1% in the second quarter, and 1.5% in the third quarter. Eurostat has provided a provisional estimate for overall annual growth of 1.5%.

This marks the third consecutive year of economic growth after three years of downturn from 2011 to 2013. However, just as in 2014 and 2015, economic growth in Portugal during the review period was slightly below both the EU-28 and the euro zone average. Moreover, and more worrying, economic growth slowed relative to 2015, with the 2016 rate about 0.3 percentage points lower than that of the previous year. Evidence from 2017 as of the time of writing suggested a further continuation of this pattern. In the first quarter of 2017, GDP growth stood at 1%, well above the EU and euro zone averages. However, the rate for the second quarter of 2017 was just 0.2%, below the benchmark averages.

Citations:
Eurostat, “Gross domestic product, volumes” available online at: http://ec.europa.eu/eurostat/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=teina011&language=en

Peter Wise, “Portugal’s economic revival brings ‘crisis of good news” Financial Times 5 June 2017.

Negocios 23 May 2017.

Eurostat (2017), “GDP up by 0.6% in both the euro area and the EU28,” available online at: http://ec.europa.eu/eurostat/documents/2995521/8134589/2-16082017-AP-EN.pdf/dc908a55-fc6d-42d8-ac25-d20c44fc40aa

Eurostat, “Real GDP growth rate – volume,” available online at: http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00115&plugin=1

Labor Markets

#30

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
Unemployment rates maintained the downward trajectory identified in the last three reports. According to Eurostat, Portugal’s general unemployment rate was 8.5% in October 2017, a drop of more than two percentage points relative to October 2016. This was the lowest such rate since April 2008. It should be noted that the rate was 17.9% in January 2013. This is very good news for Prime Minister Costa’s government, which made labor policy a key election-platform issue.

However, this decline has not been entirely due to labor-market policies. The available evidence suggests that two main factors have driven the phenomenon. The first is a return to real economic growth after a period of contraction between 2011 and 2013. The second is the continued effect of very high levels of emigration. The most recent data for 2016, produced by the National Statistics Institute (Instituto Nacional de Estatística, INE) and provided by Pordata, indicates that some 97,151 people emigrated (on either a permanent or temporary basis) in 2016. This is still a very high number, even if somewhat lower than the 2015 figure (101,203 emigrants). While this data indicates that emigration numbers are stabilizing and even falling, it must be noted that at close to 100,000 per year, they remain very high. This number is relevant if we consider that, according to Eurostat, the absolute number of unemployed people declined by a quantity that closely mirrors the emigration statistics, with the number of unemployed people falling by 89,000 between October 2015 and October 2016 (639,000 to 550,000 unemployed); and by a further 109,000 between October 2016 and October 2017. The Costa government honored its pledge to increase the minimum monthly wage in 2017, boosting it to €557 per month from €530 in 2016. This increase was approved by business associations, which negotiated a 1.25 percentage-point reduction in their social-security contributions for workers who benefit from this wage increase.

Moreover, it should be noted that youth-unemployment rates did not decline over this period. While the overall unemployment rate has fallen – to a point below the euro zone average in October 2017 – the youth-unemployment rate has remained fairly stable at a high level. In November 2016, it stood at 26.9%; in October 2017, it was 25.6%, reflecting a small increase since July of that year. This total was well above the euro zone average of 18.6% in October 2017. The stability shown by youth unemployment is consistent with the analysis above – that is, that labor-market policies have not been wholly responsible for this fall in unemployment.

With the backing of its parliamentary allies, the government has sought to combat the circumvention of legal requirements to provide contracts to workers. One example of such tactics is that of “fake green receipts,” which involves paying workers who de facto are full-time employees of a company as independent workers, thus according them considerably less job security and social security. A new law (Law 55/2017) that came into effect in August 2017 seeks to tighten control over these situations. The actual effects of this legislation will become clear over time, but initial evidence suggests there has been no immediate impact.

Citations:
RTP 30 May 2017. Economia.

http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Profiles/Country/PRT.pdf
http://www.oecd-ilibrary.org/economics/country-statistical-profile-portugal_20752288-table-prt.

Eurostat, “Unemployment rate by sex and age – monthly average, %,” available online at: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=une_rt_m&lang=en

Pordata, “Emigrantes: total e por tipo – Portugal,” available online at: http://www.pordata.pt/Portugal/Emigrantes+total+e+por+tipo-21

Eurostat, “ Harmonised unemployment rates (%) – monthly data,” available online at:
http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ei_lmhr_m&lang=en

Eurostat, “Harmonised unemployment (1 000) - monthly data,” available online at: http://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do


Eurostat, “Harmonised unemployment rate by sex,” available online at: http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teilm020&plugin=1

João Pedro Pereira (2016), “Salário mínimo sobe para 557 euros e patrões conseguem desconto extra na TSU“, Público Online - 22/12/2016, available online at: https://www.publico.pt/2016/12/22/economia/noticia/ha-acordo-na-concertacao-social-patroes-ainda-ganham-mais-com-a-reducao-da-tsu-1755860

Taxes

#36

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
The very high levels of taxation on income and consumption noted in the previous SGI reports have remained in this period. The Costa government’s 2016 budget initiated a gradual phasing out of the extraordinary income surtax introduced during the bailout period. The changes to the surtax meant that the tax burden as a percentage of GDP fell in 2016 for the first time in four years, from 34.6% of GDP in 2015 to 34.4% of GDP in 2016. However, levels remain very high by historic comparison, a consequence of the massive tax increase of 2013, which boosted the tax burden from 31.8% of GDP (below the OECD average) to 34.1% of GDP (above the OECD average). Indeed, the average tax burden between 2000 and 2012 was about 31.1% of GDP.

The Costa government’s 2017 budget continued the gradual phasing out of the income surtax, removing it beginning in January 2017 for taxpayers in the second-lowest bracket (annual incomes of €7,091 to €20,261); beginning in July 2017 for the third-lowest bracket (up to €40.522 annual income); and beginning in November 2017 for taxpayers in the higher brackets. However, even with this change, tax policy continued to fall short of achieving horizontal and vertical equity during this period.

While the government has adopted measures to combat tax avoidance, the problem is far from being eradicated regarding income tax. Moreover, at the corporate level, the effective tax rate often remains disproportionately low for comparatively profitable companies. Furthermore, the public finances’ considerable dependence on indirect taxation measures such as the value-added tax fails to satisfy the vertical-equity criterion.

Citations:
Dinheiro Vivo, “Carga fiscal recua para 34,4% à boleia da descida da sobretaxa,” available online at: https://www.dinheirovivo.pt/economia/galeria/estes-sao-os-paises-da-europa-com-a-carga-fiscal-mais-pesada/

Budgets

#23

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
Clearly, the most important economic development during the reporting period was Portugal’s departure from the European Union’s excessive deficit procedure black list in May 2017. The budget deficit for 2016 stood at 2% of GDP, the lowest level since democracy was established in the mid-1970s. Moreover, this deficit was below the government’s own forecast for the year, as well as the forecasts offered by the EU and major credit-rating agencies. This represents a reduction of the deficit by more than half relative to 2015, when the shortfall stood at 4.4% of GDP.

This review period’s advances were aided by some one-off measures, including the sale of military equipment. However, the independent Council of Public Finances estimates that even excluding these one-off measures, the deficit would have stood at 2.5% of GDP.

These positive results led then-German Minister of Finance Wolfgang Schäuble to dub Portuguese Finance Minister Mário Centeno the “Cristiano Ronaldo of the Ecofin” in May 2017.

This budget result also prompted one of the big-three credit agencies, Standard & Poor’s, to raise Portugal’s score above the “junk” level in September 2017, after more than five years at this level.

However, it should be noted that the absolute level of public debt remains very high, actually increasing marginally in 2016 to 130.1% of GDP, up from 128.8% of GDP in 2015. Within the EU, this level is exceeded only by Greece and Italy.

Citations:
Orcamento do Estado para 2017.

Euronews, “Marcelo ‘feliz’ com crescimento economico de Portugal” Ultima noticias 15 May 2017.

Expresso, “Eurostat: sem ajudas ao sector financeiro défice de 2015 ficava em 2,8%,” 21 April 2016. Available online at: http://expresso.sapo.pt/economia/2016-04-21-Eurostat-sem-ajudas-ao-sector-financeiro-defice-de-2015-ficava-em-28

Observador, “INE. Défice de 2015 ficou em 4,4% do PIB, com o Banif a pesar mais que o previsto,” 24 March 2016. Available online at: http://observador.pt/2016/03/24/ine-defice-2015-ficou-44-do-pib-banif-pesar-previsto/

Diário de Notícias, “Bruxelas reitera que défice sem Banif foi 3,2% do PIB em 2015,” 3 May 2016. Available online at: http://www.dn.pt/dinheiro/interior/bruxelas-reitera-que-defice-sem-banif-foi-32-do-pib-em-2015-5155268.html

João Lima (2017), “Portugal Looks to Attract New Investors After S&P Rating Upgrade,” Bloomberg – 15/9/2017, available online at: https://www.bloomberg.com/news/articles/2017-09-15/portugal-looks-to-attract-new-investors-after-s-p-rating-upgrade

João Cândido Silva (2017), “Sem medidas extraordinárias, défice público de 2016 teria ficado em 2,5%,” Observador – 11/4/2017, available online at: http://observador.pt/2017/04/11/sem-medidas-extraordinarias-defice-publico-de-2016-teria-ficado-em-25/

Público (2017), “Défice de 2016 revisto em baixa para 2%,” Público Online – 12/4/2017, available online at: https://www.publico.pt/2017/04/12/economia/noticia/defice-de-2016-revisto-para-2-1768525

Eurostat, “General government gross debt – annual data,” available online at: http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teina225&plugin=1

Expresso (2017), “Schäuble: Centeno é ‘o Ronaldo do Ecofin’,” Expresso Online – 24/5/2017, available online at: http://expresso.sapo.pt/economia/2017-05-24-Schauble-Centeno-e-o-Ronaldo-do-Ecofin

Research and Innovation

#27

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
5
Portugal’s rank in the World Economic Forum’s Global Competitiveness Report 2017 – 2018 increased by four positions to 42nd out of 137 countries, as compared to 46th place in the previous year’s report. Moreover, its overall score reached 4.57 (up from 4.46), returning the country to the competitiveness rating achieved in 2006, long before the bailout. The European Union’s 2017 Innovation Scoreboard classifies Portugal as a “moderate innovator,” the second-lowest category (out of four). However, it also shows that Portugal’s position has declined in relation to the EU average in 2016, inverting the trend of the previous two years. Overall, this report indicates that “performance has declined by 2.4% relative to that of the EU in 2010.”

Out of the 10 dimensions considered by the 2017 scoreboard, Portugal is above the EU average in three – human resources, attractive research systems and an innovation-friendly environment.

The government is placing a great deal of emphasis on research and innovation. At the beginning of review period, from 8-10 November 2016, Lisbon hosted the Web Summit, the largest tech conference in the world, dubbed by Bloomberg as “Davos for geeks.” The 2017 Web Summit was also hosted in Lisbon, beginning on 6 November 2017. Moreover, Lisbon was named by influential tech magazine Wired as one of the hottest startup cities in Europe in 2016, an accolade repeated in 2017.

However, the Innovation Scoreboard results suggest that these tech results and initiatives are not yet percolating fully through to the economy more generally.

Citations:
https://www.weforum.org/reports/the-global-competitiveness-report-2016-2017-1

“European Innovation Scoreboard 2017 – Portugal.” Available online at: https://ec.europa.eu/docsroom/documents/23935/attachments/1/translations/en/renditions/native

Global Financial System

#39

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
5
Portugal is a peripheral country and has not sought to contribute actively to the effective regulation and supervision of the international financial architecture. For a number of years, the risk associated with the country’s high level of public debt led the government to focus overwhelmingly on achieving fiscal sustainability and financial stability. More recently the Costa government has sought to play a bigger role in contributing to EU debates on regulation, but the country remains relatively poor in the EU context.
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